MorningWord 8/23/13: Destruction of Equity – $BBRY Edition

by Dan August 23, 2013 9:23 am • Commentary

MorningWord 8/23/13:  A story in the New York Times caught my eye yesterday about Blackberry. The author does not attempt to debate the merits of a future potential LBO, or any interest from strategic buyers for the beleaguered smartphone marker, but looks back at How Blackberry Managed Past Wealth.  The main contention of the article is that BBRY (formally RIMM) is on the block now with a $5.3 billion market cap yet ($2.8 billion in cash and no debt), the company squandered nearly $3.5 billion in share buybacks back in 2008/09 near its all time highs, or at least on its decent of nearly 95% decline since.  While this has not been a particularly controversial use of corporate coffers in the last decade, the author makes a great point, the money wasn’t used to pay dividends that would have gone straight back to current shareholders, but that

“loyal shareholders did not receive any of that money. To get the money, an investor had to sell”.

So why would an apparent growth company with what appeared to be very strong positioning in their stated market chose such a tact?  The Times article makes a very good point and one that should not get lost on investors who get geeked up about share repurchases for their holdings in place of dividends and suggests that management might have “abused rules on executive stock options….giving executives good reason to avoid dividends in favor of share buybacks as:

BlackBerry executives and employees exercised options to acquire 83.3 million shares, adjusted for two stock splits. On average, they paid $4.38 a share.

One reason companies that issue a lot of options prefer stock buybacks to dividends is that while buybacks may raise the market value of the stock and thus increase the value of an outstanding option, dividends are less likely to do so. Option holders, unlike shareholders, do not benefit from dividends.

BlackBerry did just that, buying 85.5 million shares that it canceled. It bought an additional 12.3 million shares that it did not cancel but held to provide stock to issue directly to executives.  Over all, it paid an average of $36.10 for the shares it repurchased.

So not only did BBRY (the RIMM) management throw almost $400 million dollars down the drain from their repurchases aside from the canceled shares related to executive options equally about $3 billion, wow, wow.

Here is the thing, this is not that unique, and seems to be a pattern among once dominant tech titans looking to be bought.  IN January I wrote in this space about DELL (MorningWord 1/15/13: $DELL LBO, That Ol’ Chestnut) and quoted a Reuters article from Felix Salmon detailing the PC makers history of atrocious capital usage on their own buybacks, from Salmon:

Based on their annual 10K filings, from Fiscal Year 2005 to 2012, Dell has purchased approximately 989 million of its own shares at a cost of over $24bn… Going back further to 1997 (through February 3, 2012), Dell has reportedly spent approximately $39 billion in share repurchases under a $45 billion repurchase program.

So there you have it, and now Michael Dell (with private equity firms) has the financing to buy back the company that he founded for…wait for it…….$24 billion (equal to the amount of stock repurchased from 2005 to 2012).  In trading lingo, the seller would scream YOURS!

Is there anything actionable as it relates to BBRY here, no, and I suspect that if private equity has an interest in DELL, they will certainly find ways to lever up and extract some value from the sum of the parts of BBRY, but if the DELL situation should serve as any guidepost, I would suspect that the long history of negative equity issuance will likely put a psychological cap on the potential upside of such a deal.